The Companies Act, 1956 through its Section 408 empowers the Central
Govt. to appoint director(s) in a Company, subject to the order of CLB under
certain circumstances as mentioned below:
(1) to safeguard the interests of the
company, or its shareholders or
(2) in the public interests.
When can such Directors be appointed?
(1) On a reference made to it by the
Central Government or
(2) On an application of not less than
one hundred members of the company or of the members of the company holding not
less than one-tenth of the total voting power therein;
After such inquiry as the CLB deems fit
to make, that it is necessary to make the appointment or appointments in order
to prevent the affairs of the company being conducted either in a manner which
is oppressive to any members of the company or in a manner which is prejudicial
to the interests of the company or to public interest :
Provided that in lieu of passing an
order as aforesaid, the CLB may, if the company has not availed
itself of the option given to it under section 265, direct the company to amend
its articles in the manner provided in that section and make fresh appointments
of directors in pursuance of the articles as so amended, within such time as
may be specified in that behalf by the CLB.
In case the CLB passes an
order under the proviso to sub-section (1), it may, if it thinks fit, direct
that until new directors are appointed in pursuance of the orders aforesaid,
such number of persons as the CLB may, by order, specify as being
necessary to effectively safeguard the interests of the company, or its
shareholders or the public interest, shall hold office as additional directors
of the company and on such directions, the Central Government shall appoint
such additional directors.
Office Tenure of such Director(s)
Such directors, as may be appointed by
the CG, hold office for such period, not exceeding three years on any one
No requirement of holding qualification of shares:
The Director appointed by the CG, shall
not be required to hold any qualification shares, even though the articles of
the company requires it.
Not liable to retire by rotation:
The office of Director appointed by the
CG, shall not be liable to determination by retirement of directors by
For the purpose of reckoning two-thirds
or any other proportion of the total number of directors of the company, any
director(s) appointed by the CG shall not be taken into account.
Confirmation of the CLB on changes in composition of Board of Directors:
Every change in the composition of
Board of directors, made during the tenure of the director appointed by CG,
shall have effect unless confirmed by the CLB.
Directions of the Central Govt.:
The Central Government may issue such
directions to the company as it may consider necessary or appropriate in regard
to its affairs and such directions may include directions to remove an auditor
already appointed and to appoint another auditor in his place or to alter the
articles of the company, and upon such directions being given, the appointment,
removal or alteration, as the case may be, shall be deemed to have come into
effect as if the provisions of this Act in this behalf have been complied with
without requiring any further act or thing to be done.
Periodic Reporting to the Central Govt.
The Director appointed, as stated
above, has to report to the Central Government from time to time with regard to
the affairs of the company.
Removal of the Director appointed by CG:
The Central Govt. may remove such
director(s) appointed by it and may appoint another person in his place, at its
Not liable to Prosecution for Companies act provision violation
Directors nominated by the Government
u/s 408 of the Companies Act, 1956 shall not be held liable for any act of
omission or commission by the company or by any officers of the company which
constitute a breach or violation of any provision of the Companies Act, 1956,
and which occurred without his knowledge attributable through Board process and
without his consent or connivance or where he has acted diligently in the Board
process. The Board process includes meeting of any committee of the Board and any
information which the Director was authorised to receive as Director of the
Board as per the decision of the Board. (General Circular No. 08/2011,
No.2/13/2003/CL- V, Government of India, Ministry of Corporate Affairs, dt 25th march
Note : With effect from the Companies
(Second Amendment) Act, 2002, the powers of the CLB under Section 408 has been
transferred to the Tribunal. (effective date yet to be notified)